Bankruptcy Chapter 7, 11 and 13 for Businesses
It is just about impossible to start a business without personally guaranteeing it. To obtain credit business owners are often forced to guarantee the loans to the business. When the business fails, the owner has to file a personal bankruptcy due to the personal guarantees.
A failed corporation often has trust tax liabilities. If trust taxes such as sales and withholding taxes are not paid these liabilities follow all of the corporate officers.
The correct bankruptcy option that is right for you depends on whether your business is an LLC, sole proprietorship, corporation; whether you have trust tax liability from the corporation, what your goals are and whether you are personally liable for your business’ debt. You may want to continue the same type of business.
The old corporation may need to file bankruptcy, close and reopen to continue operations. A new corporation may need to be formed from the assets of the old company. A Chapter 7 may be best if you no longer wish to continue operating a business which has no assets, and no positive cash flow.
Chapter 11 has a very high failure rate and cost. Which type of bankruptcy you need to file is important along with when you file and whether the business owners need protection or filing. Be sure to use someone who knows the differences.
Chapter 7 Kentucky Business Bankruptcy
Filing a Personal Chapter 7 for Business Debt
You automatically qualify for a Chapter 7, if the majority of your debt is business debt or your income is low enough to qualify. Chapter 7 is the quickest, cheapest and most effective option if you have few or no assets to lose.
To make sure this is your best option check, look at the exemptions. A Chapter 7 will not only release you from business debt, but it will also eliminate your personal debt.
In the process of closing a business, it is essential to pay the trust taxes first before paying creditors. Trust taxes will follow the corporate officers if they are not paid from the business assets. To insure this, you may want to liquidate the remaining assets and pay these taxes before filing bankruptcy, or you may want the Trustee to liquidate and pay the taxes for you.
Filing a Chapter 7 for The Business
Filing Chapter 7 liquidates the corporate or business assets and pays the creditors. This may be a quick and easy method to close the corporation and stop most if not all of the lawsuits against the corporation. But if your corporation is an S corporation, be sure to consider revoking your S-Election.
Converting to a C-Corporation before filing bankruptcy ensures forgiveness of the corporation debt does not become your personal tax liability. Many attorneys and even CPA’s forget to convert before filing bankruptcy for a SubChapter S Corporation. The forgiveness of debt becomes a tax liability unless you personally are filing.
Chapter 13 Kentucky Business Bankruptcy
A Business cannot file a Chapter 13. But a person who owns the business can file a Chapter 13 and operate or liquidate the business over time. A Chapter 13 Bankruptcy has many tools to deal with debt that a Chapter 7 does not have. It is very useful if the business needs to continue operations or needs to wind down. Filing a Chapter 7 normally means immediate closure of the business and a takeover by the Trustee who liquidates assets.
In Chapter 13, the Debtor retains control of the business and assets. You may need or be forced to file as a Chapter 13 if:
- your income is too high for a Chapter 7, and your debts are primarily consumer debts or
- Your essential assets are unprotected in Chapter 7.For a Chapter 13, your secured debt must be under about $1.2 million, and unsecured debt must be under $395,000.
But a Chapter 13 allows you to continue to run the corporation and discharge your personal liability for the corporation from the dischargeable debts. There are limitations
- Trust taxes are not dischargeable.
- The plan must pay back secured creditors the value of their security
- A Chapter 13 must pay back everything Chapter 7 would have paid if everything was liquidated in Chapter 7.
- To protect the cosigner, you must pay that cosigned debt in full
But a Chapter 13 allows you to restructure the business and personal debt. Your personal debt may be paid back partially or even at a zero percentage. Even income taxes may be discharged. But you should remember to consider converting your Chapter S to a Chapter C corporation before filing. If you are filing bankruptcy, there is normally no income tax consequences from extinguishing the debt. But other guarantors may be affected.
Chapter 11 Kentucky Business Bankruptcy
The major disadvantages of a Chapter 11 are:
- it is difficult to file and to maintain the monthly reports to the court,
- it is very expensive (one client paid a firm $30,000 and the case was never filed. We filed a Chapter 7 for $3,000 and got the results he wanted)
- the extreme unlikeliness of success over 95 % of Chapter 11 cases fail.
Nearly 95% of all Chapter 11’s fail and are either dismissed or convert to a Chapter 7. A Chapter 7 may not be available to you if your income is too high and the majority of your debt is consumer debt. A Chapter 13 is not available to your if your debt is over about $1.4 million.
Chapter 11 has some very good business tools which will allow you relief from business debts such as the ability to force the sales of some property. Some people file as a Chapter 11 just to use these tools and then quickly convert to a Chapter 7 or 13. But a little creativity and design will allow a Chapter 7 or Chapter 13 to do nearly everything a Chapter 11 can do. Plus a Chapter 7 has a near 100% chance of being completed and a Chapter 13 has over a 90% chance of completion if you make the payments.
If you need to bankrupt a business or need to protect yourself from being personally sued for business debt, contact Nick Thompson. By engaging the assistance of an experienced bankruptcy and asset protection attorney, you can decide which type of bankruptcy is best for you.
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